As an exception to the rules governing deductions in our Income Tax Law, administrative rules allow taxpayers to increase their deductions as a result of transfer pricing adjustments for year 2016 provided a number of requirements are met, including:
- Timely filing the following all tax returns including information returns.
- Preparing and keeping all documentation and information showing that the original transactions was not at arm's-length.
- Preparing and keeping a statement, under oath, explaining the reason why the originally agreed prices, consideration or profit margins did not conform to the arm's-length standard.
- Preparing and keeping a statement, under oath, explaining the consistency or inconsistency (i) of the transfer pricing methodologies applied by the taxpayer and (ii) of the search for comparable transactions or entities, both at least with respect to the tax year immediately preceding the year of the transaction being adjusted.
- Preparing and keeping all documentation and information to show that in carrying on the transfer pricing adjustment the adjusted transactions considered the prices, consideration or profit margins independent parties would have used in comparable transactions. This documentation and information must include the arithmetical calculation of the transfer pricing adjustment.
- Keeping on file the invoices corresponding to the original transaction that was adjusted.
- If the Mexican taxpayer also recognizes accounting book effects for the transfer pricing adjustment, it must, as the case may be, either (i) issue an electronic invoice (CFDI) or (ii) keep the CFDI issued by the related party resident of Mexico or the Rule 220.127.116.11 invoice issued by the nonresident related party, corresponding to the adjustment.
- If the transfer pricing adjustment is for tax purposes only (and not for accounting purposes), the adjustment must be recorded in the books of account in a memorandum account and it must be recognized in the book-to-tax reconciliation.
- Evidencing that the related party in the adjustment recognized income or reduced its deductions, as the case may be, in the same tax year in which it was deducted by the Mexican taxpayer and in the same adjusted amount.
- The taxpayer should also evidence that the adjustment does not represent income subject to Mexico's preferential tax regime.
- To withhold and pay in the withholding tax corresponding to the transfer pricing adjustment. As mentioned earlier, when the taxpayer is unable to identify the date on which the adjustment was legally due and payable, the taxpayer must consider that it was payable on the last day of the tax year in which the original transaction took place.
Taxpayers have until June 30 to file transfer pricing adjustments resulting in larger deductions for tax year 2006. Where the adjustments result only in larger revenues there is no deadline; here taxpayers can make the adjustment at any time by filing an amended tax return.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.